Bernanke Warns Senators: Sequestration Will Trigger Recession

20 Sep 2012

Federal Reserve Chairman Ben Bernanke met with Senators on the Senate Finance Committee on Wednesday in a closed-door meeting and urged the lawmakers to avoid taking the country off the so-called fiscal cliff and into a recession.

Bernanke stressed this would happen if the Bush tax cuts expire across all income levels while automated spending cuts go into effect after the lame duck session of Congress.

Senators, according to The Hill, “made clear that Bernanke warned them of the consequences of allowing the nation to go over the fiscal cliff.”

Sen. Orrin Hatch (R-UT) said Bernanke said it would be “really dire if we go off the cliff” and also noted that “if we go into sequestration, we are going to go into a recession.”

Sen. Kent Conrad (D-ND) said Bernanke’s message was that “we have got to keep this recovery going but we also need a longer term plan” on the deficit. He continued, Bernanke told them it would be “very helpful if we here were to make changes that would put us on firmer fiscal footing.”

Senators who attended the meeting said the “group also spent time discussing other economic matters, including the European debt crisis and the Fed’s recent decision to embark on a third round of ‘quantitative easing.'”

The Fed’s decision last week to pump more money into the economy by purchasing $40 billion of mortgage-backed securities a month caused ratings firm Egan-Jones to downgrade America’s credit rating for the second time this year.

Senators also said “Bernanke did not make specific policy recommendations about how to address the expiring tax cuts and automatic spending cuts” and “reiterated that the central bank does not have the ability to ward off the damage inflicted by the cliff if Congress cannot come to an agreement.”

Hatch said he pressed Bernanke on the consequences of more quantitative easing, and Bernanke told the group he would have to “back off” if inflation starts to rise.

“His response was that inflation is under control, that there is very little likelihood that we would get into an inflationary spiral,” Hatch said. “But if we did, he would have to back off quantitative easing. At least that’s the way I interpreted it.”